A Guide to Reimbursement

A Guide to Reimbursement

Table of content

  1. What is reimbursement?
  2. Are reimbursements taxable income?
  3. Example: Reimbursements – not assessable income
  4. Example: Reimbursements – assessable income
  5. Reimbursement vs Allowance
  6. FAQ
  7. How Workstem streamline your reimbursement management?

Reimbursement is an aspect of financial management for both employees and employers, ensuring that expenses incurred in the course of work are appropriately covered. We’ll explore reimbursement and discuss how Workstem can streamline your reimbursement management in this comprehensive blog.

What is reimbursement?

Reimbursement refers to the process of repaying employees for expenses they incur while performing their job duties. These expenses can encompass a wide range of items, such as travel, meals, equipment, and more. In essence, reimbursement is a mechanism to ensure that employees are not financially burdened by expenses related to their work responsibilities.

Are reimbursements taxable income?

In general, reimbursements are not considered taxable income when they are made for genuine work-related expenses, which means that employees do not pay tax on these amounts, and employers can claim a tax deduction for the reimbursements provided.

While a payment is a reimbursement for tax purposes if it is a precise compensation, in part or full, for an expense already incurred, even if the expense has not yet been paid.

Your not-for-profit organisation will reimburse your volunteers when you consider they have incurred expenditure on behalf of the organisation. The volunteer may be reimbursed for all or part of the expense.

A payment is more likely to be a reimbursement where you require your volunteer:

  • to provide a receipt or otherwise substantiate expenses
  • refund unspent amounts.

Example: Reimbursements – not assessable income

Let’s say you are an employee who often travels for work, and your employer reimburses you for your travel expenses, such as accommodation, meals, and transportation. In this case, if the reimbursements are made strictly to cover your actual expenses and are properly documented, they are typically considered non-assessable income.

Example: Reimbursements – assessable income

Suppose you are a self-employed contractor or a sole trader providing services to a client. Your client reimburses you for certain business expenses you incurred on their behalf, such as purchasing materials or equipment. In this scenario, the reimbursements may be considered assessable income.

*Source: ATO

Reimbursement vs Allowance

Reimbursements and allowances may seem similar but are fundamentally different.

Reimbursements are repayments for actual expenses incurred by an employee, while allowances are fixed amounts paid to emloyees regardless of their actual expenses. Allowances can be taxable, while reimbursements typically aren’t.p

Reimbursement

Reimbursement is repayment for actual expenses incurred by an employee on behalf of their employer or another entity. These expenses are typically related to work-related activities, such as travel, meals, accommodation, or other business-related costs.

Reimbursements are generally not considered assessable income for tax purposes. The individual does not need to pay tax on the reimbursed amount because it’s seen as a return of their own money spent on behalf of their employer.

Allowance

An allowance is a set amount of money provided to an individual, often by an employer, to cover specific expenses or costs. Unlike reimbursements, allowances are usually a predetermined, fixed sum, and they may not be tied directly to actual expenses incurred.

Allowances can have different tax implications, depending on the type of allowance. Some allowances may be considered assessable income and are subject to taxation, while others may be exempt from tax. The tax treatment of allowances depends on the purpose of the allowance, whether it is a taxable or non-taxable allowance, and how it’s documented and reported, etc,.

Read More: A Guide to Allowance

FAQ

Q: What is the impact of GST on employee reimbursements?

A: The Goods and Services Tax (GST) may apply to some reimbursements. If an employee is reimbursed for an expense that includes GST, the reimbursement should also include the GST amount. The employee can then claim the GST as an input tax credit. However, if an employee is reimbursed for a GST-free expense, there is no GST applicable.

*Find more information about GST.

How Workstem streamline your reimbursement management?

Workstem, your one-stop payroll and HR software, can help employers and employees simplify reimbursement management. We offer features that facilitate record-keeping, expense tracking, expense claims, and real-time approval via mobile App. With Workstem, your entire reimbursement management process is transparent, compliant, and hassle-free.

Workstem provides a streamlined and compliant approach to handling payroll and tax, which enables businesses to customise tax addition and deduction items on reimbursement. You can ensure that your reimbursement processes are not only efficient but also compliant with Australian tax regulations, allowing businesses and individuals to make more informed financial decisions.

Take control of your payroll issues with Workstem. Reach out to us now!

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